Sector Update

June 11, 2018

Small yield increases occurred across most of the investment grade market last week. The full term structure of the Treasury market finished 2-4bp higher.  The path to these slightly higher yields included one particularly interesting turn, a sudden and short-lived spike in bond prices that pushed yields 10bp lower on Thursday, with ten-year Treasury yields dipping from 2.99% to 2.89%.  Yields revisited the low end of this range again on Friday before returning to the trendline and finishing the week slightly higher.

Most other sectors posted larger yield increases than Treasuries last week. Mortgage-related securities, both MBS and CMOs, finished at wider yield spreads versus the Treasury curve, with thirty-year MBS and longer average life CMOs widening 3-4bp, while shorter CMOs only widened 1bp. Agency callables did not push much wider on the week but held close to their highest spread levels in several months for most structures. Most names in the corporate sector slightly underperformed Treasuries on the week, widening 1-3bp versus Treasury yields for the intermediate and longer maturities. Meanwhile, the contrarian municipal sector actually outperformed Treasuries with yield spreads finishing tighter.

Activity levels picked up last week from the prior two slow weeks. Portfolio managers still moved in a seemingly reluctant fashion though, with modest levels of inquiries and trades. Activity seemed to be picking up in earnest before the unusual flash rally pushed prices higher, and by the time prices fell back the weekend was closing in and volume failed to reestablish itself.

Friday’s five-year Treasury closing yield of 2.79% exceeded the daily closing average so far this year by 16bp and was 55bp higher than the average since one year ago. The ten-year Treasury finished at 2.95% Friday, 12bp higher than the year-to-date average and 42bp above the average for the last year.




Adjustable Rate Mortgage Market Update

Spreads were unchanged in ARMs last week despite the widening in their fixed-rate counterparts.  Over the past several months, ARM spreads have moved wider as a result of higher WACs on new origination, which have higher option cost.  Lower dollar price ARMs continue to have value, as future originations should continue to have higher WACs and increased prepayment risk.

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Agency Market Update

Agency yields increased across the curve last week, moving in line with the rise in Treasury yields.  Two-year Agency bullet yields increased 3 bps to 2.56%, 5-year bullet yields increased 4 bps to 2.87%, and 10-year bullets increased 5 bps to 3.25%.  

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Fixed Rate Mortgage Market Update

Fixed-rate MBS underperformed Treasuries this past week, likely influenced by the elevated rate volatility experienced during the past two weeks.  15-year MBS yield spreads ended the week 3bps wider to Treasuries, while 30-year MBS yield spreads widened 4bps. 

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Municipal Market Update

Prices on municipals were mixed daily through Wednesday. On Monday bonds maturing 10 years and in were steady, while the long-end weakened. On Tuesday the front-end strengthened, while bonds maturing 10 years and longer were steady. On Wednesday the front-end strengthened, while bonds maturing 10 years and longer weakened.

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SBA Market Update

The twenty-year DCPC auction last Thursday priced at the widest spreads since February 2016. Activity in floaters is expected to pick up this week as much of the market expects a short-term rate increase from the Fed on Wednesday. Investors were also active in government-guaranteed USDA agricultural loans last week.

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